Haven Blog

Demystifying the Payroll Version of R&D Tax Credits

When it comes to growing your business, every dollar matters. That’s where R&D tax credits come into play. These incentives offer a fantastic opportunity for companies of all shapes and sizes to recoup some of their research and development expenses. In this article, we’ll break down the payroll version of R&D tax credits, making a complex topic easy to understand.

Qualifying Activities for R&D Tax Credits

First things first, what activities qualify for R&D tax credits? At Haven, we specialize in uncovering those qualifying activities that often go unnoticed. This includes not only technical roles but also non-technical ones. The great news is that we’ve found credits for companies across various industries, sizes, corporate structures, and even for those not yet turning a profit.

The key to R&D tax credits lies in innovation and problem-solving. If your company engages in activities that seek to develop new products, improve existing ones, or enhance processes through technological advancements, you’re likely eligible. This could involve software development, engineering, scientific research, or even the creation of new manufacturing techniques.

Your company may be able to apply the R&D tax credit against payroll tax if the following are true:

  • You’ve never had gross receipts or only had them within the last five years.
  • You have less than $5 million in gross receipts during the current year.
  • You have qualifying research activities and expenditures that meet the IRC Sec. 41 four-part test.

Business Entity Types and Eligibility

One might wonder if their business entity type affects eligibility for R&D tax credits. In most cases, it doesn’t matter. All business types, including S Corporations, sole proprietorships, partnerships, corporations, and LLCs, qualify for R&D tax credits. The only exception is non-profit organizations (501c3s) because they don’t have tax liabilities to offset with credits.

This inclusivity is a key strength of the R&D tax credit program. It encourages businesses of all sizes and structures to invest in research and innovation, promoting economic growth and technological advancement across the board.

R&D Tax Credits for Startups

You might be wondering if your startup, which isn’t profitable yet and isn’t paying taxes, can still apply for R&D tax credits. The answer is a resounding “yes!” Even early-stage, pre-revenue startups can leverage federal R&D credits against their payroll taxes. If you haven’t set up payroll yet, don’t worry; you can carry these credits forward as assets on your balance sheet until you’re ready to use them.

For startups, R&D tax credits can be a lifeline. They provide a way to offset some of the costs incurred during the crucial early stages of research and development. This financial boost can help startups channel resources into innovation and growth, setting the stage for future profitability.

Your Potential Savings Opportunities

Companies that develop new or improved products, processes, or software can:

  • Generate up to $250,000 annually until December 31, 2022, after that the Inflation Reduction Act increased the election to $500,000 in R&D credits to use against your payroll tax.
  • Receive a credit equal to 10% of your eligible R&D spend.
  • Generate payroll credits for up to five years—for up to $2.5 million in total credits.

The additional $250,000 would be used to offset the employer-paid Medicare payroll tax of 1.45% each calendar quarter. The R&D payroll tax credit attributable to the employer-paid Medicare tax must not exceed the tax imposed. Any unused R&D credits will be carried forward and applied to a succeeding calendar quarter as a credit.

R&D Tax Credit

How the Process Works

Now, let’s take a closer look at how the process of claiming R&D tax credits against your payroll tax liability works:

  • Assess Eligibility: The first step is to determine if your business meets the eligibility criteria for R&D tax credits against payroll tax. This includes evaluating your gross receipts and research activities.
  • Identify Qualifying Activities: Work with professionals to identify the specific research and development activities that qualify for credits. This involves a thorough examination of your projects and expenses.
  • Calculate the Credits: Once qualifying activities are identified, professionals will calculate the credits you’re eligible for.
  • Documentation and Filing: Proper documentation is essential. Our professionals will help you compile all the necessary documentation and file the appropriate forms to claim your credits.
  • Carryforward: Any unused credits can be carried forward to subsequent quarters, ensuring that you make the most of this valuable incentive.

Confidently Claim Your Credits

Each payroll provider or professional employer organization (PEO) may have a different process for handling the credits, and businesses are often left to assess these nuances on their own. Our professionals are highly experienced in navigating these distinctions and can even file claims on your behalf if needed.

Credits that aren’t properly documented also risk rejection by taxing authorities. Our detail-oriented team will help you identify and compile the documentation needed to advance through the credit process from start to finish.

Seizing the Potential of R&D Tax Credits with Haven

In conclusion, R&D tax credits can be a game-changer for your business, whether you’re a startup on the cusp of innovation or an established corporation seeking to drive further growth. These credits provide a valuable opportunity to recover costs, invest in innovation, and bolster your financial resources.

At Haven, we specialize in uncovering qualifying activities that often go unnoticed and assisting businesses in confidently navigating the complex process of claiming R&D tax credits against payroll tax liability. With our professionals by your side, you can harness the power of R&D tax credits to fuel your business’s success, drive innovation, and secure a brighter future.

Ready for Haven to help claim your credits? Book a call now!